The authors in this article examines how procedures used in different audit methodologies influence the likelihood that auditors will integrate their business risk judgments about risk of material misstatements. Auditing standards require auditors to assess business risk, which are “conditions that threaten an organization’s ability to execute business processes effectively”. The two methodologies focused on in the article are the transaction-focused approach (TFA) and the strategic-systems approach (SSA). The transaction-focused approach emphasizes transaction cycle relationships, meaning it focuses on specific accounts. Whereas the strategic systems approach focus on attention to business processes needed to achieve the auditee’s strategy.
The authors attempt to prove that auditors using SSA is better at detecting risk of material misstatement than the transaction-focused approach by providing evidence that SSA helps auditors integrate their business risk judgment when they assess the risk of material misstatement. Integrating knowledge of business risk into risk of material misstatement can improve audit effectiveness by helping auditors develop a richer and more complete appreciation for the business processes that drive financial performance. SSA also integrates nonfinancial benchmarks which may also help auditors detect signals of intentional fraudulent reporting and making it more difficult to conceal fraud this due to the fact that business process performance are usually controlled by business process owners and not by high level managers.
Their research hypothesis predicts auditors’ business risk assessment will directly influence their judgment about the risk of material misstatement only when auditors with SS training and expertise use SS decision support. Findings suggest compared with SSA auditors, those who are trained in TFA may be